WRAPUP 2-China stocks extend losses after worst day in months

SHANGHAI, Nov 24 (Reuters) - Chinese stocks slipped further on Friday after the biggest selloff in months the previous day, with fresh government steps to reduce financial risks and a rout in the bond market sapping investors’ confidence.

The blue-chip CSI300 Index ended the morning down 0.8 percent at 4,069.00 points, putting it on track for its worst two days of trading since May last year.

It had tumbled nearly 3 percent on Thursday, its worst one-day loss in nearly 18 months.

The Shanghai Composite index fell 0.6 percent to 3,332.27, after skidding 2.3 percent the previous day in its worst performance since December.

Equity investors remained on edge over further regulatory clampdowns and rising corporate borrowing costs, even though the benchmark 10-year treasury bond yield pulled back slightly from a three-year high of 4.03 percent on Thursday and bond futures edged up 0.3 percent.

The yuan currency traded around five-week highs on the back of the weaker dollar.

Stocks dove on Thursday amid an extended bond selloff, and following new policies aimed at curbing micro-lending and tightening regulation of asset management businesses - both of which were seen as likely to eat into liquidity.

Chinese stocks have been on a tear in the second half of the year, and analysts said some investors were selling to lock in profits.

“We have seen a bull run in blue chips this year. But no matter how good a company is, its price cannot go up forever,” said Wu Kan, head of equity trading at Shanshan Finance.

“Fund managers who have embraced those high-flying stocks are under pressure to lock in profit” as the end of the year approaches, he said.

Before Thursday’s fall, the CSI300 had risen more than 26 percent since early May, while the Shanghai Composite Index was up about 13 percent.

Signs of Beijing’s stepped-up, “de-risking” campaign come at a time when emboldened investors have been borrowing more to bet on a select group of blue chips, lured by their sharp gains, and a chorus of upgrades from increasingly optimistic analysts.

Outstanding margin financing - money investors borrowed from brokerages to buy stocks - has exceeded 1 trillion yuan ($151.90 billion) for the first time in almost two years.

Investor bets have been highly concentrated in a group of industry leaders which have far outperformed the broader market this year, including insurance giant Ping An, famed liquor maker Kweichow Moutai and chip-maker BOE Technology.

But there are signs that regulators are growing nervous about frothy valuations.

In a rare move, the Shanghai Stock Exchange sent a letter to Essence Securities on Monday, questioning the rationality of the brokerage’s Nov. 16 report that raised Moutai’s target price to 900 yuan - 25 percent higher than the stock’s market price at the time.

And earlier in the month, the state news agency Xinhua and the company itself warned that the share price was rising too quickly.

Moutai’s shares have dropped 13 percent since their peak on Nov. 16, and were down 1.2 percent on Friday.

BOND WORRIES

Worries about tighter lending regulations have pushed the yield on 10-year treasuries up by nearly 40 basis points since the end of September, despite frequent and hefty central bank cash injections into money markets.

Some of the new asset management proposals “target investment firms that borrow short-term funds to invest in longer-term debt. Such a strategy is risky, given the high leverage ratio,” economists at DBS Bank said in a note this week.

The yield on 5-year AAA corporate debt rose to its highest level in more than three years amid the selloff.

“The government’s determination to reduce leverage has not been fully priced in by the market yet,” said Gu Weiyong, chief investment officer at bond-focused fund house Ucom Investment Co, adding that stock investors had been particularly slow to react.

“Shadow banking had been a big supplier of liquidity to risky assets, so the reallocation of money to be triggered (by the new rules) will have a big impact on asset prices.” (Additional reporting by Winni Zhou and Liu Luoyan; Editing by Shri Navaratnam and Kim Coghill)